How to Adjust Entries to Show the Largest Net Income
In accounting, entries recorded in the general journal can be adjusted at the end of an accounting period to allocate income and expenses to the period in which they actually took place. The basis of making adjusting entries relies on the revenue recognition principle, which determines the accounting period in which revenues and expenses are realized and earned. Accounting is a dual-entry system, so for every increase or decrease in a general account on the balance sheet, a corresponding increase or decrease to an income statement general ledger account must occur. By adjusting appropriate journal entries at the end of the period, your income will reflect a more accurate figure. In some cases, this may be a larger figure compared with the income expressed before the adjusted entries.
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Instructions
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Find the journal entry that reflects the wrong amount. You should keep your journal entries for the period organized in a folder on your computer so it can easily be accessed via the accounting software or spreadsheet software that you use.
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Examine the general ledger accounts to find which ones were affected by the journal entry posting. Double-check your examination for accuracy to ensure that you will be working with the correct accounts to make the adjustment.
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Create a brand new journal entry to reverse the original journal entry that needs to be changed at the end of the period to accurately affect the adjusted transaction. For instance, if you posted a journal entry for a deposit of cash for sales income in the amount of $200 but the actual amount deposited in the bank was $250, then you need to create an adjusted journal entry for the $50 surplus of sales income. To adjust this, you would increase the checking account balance by $50 and increase the sales income account balance by $50.
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Repeat the previous step for all journal entries that need adjustments to reflect incorrect transactions. Remember that every change in a balance sheet account requires a change in a corresponding income statement account. When finished with adjusting the entries, post the adjusting journal entries and print a copy for your records.
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Print a copy of the original journal entries before the adjustments and staple it to the copy of the adjusted journal entries. If you had a lot of adjustments that required sales income and cash or accounts receivable to increase, then a larger net income will be revealed on the income statement to account for the positive adjustments.
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Write explanations on each journal entry that describes why the adjustment was made. This is important in case you need to refer to the financial records and adjusted journal entries in the future for audits or tax purposes.
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Tips & Warnings
File the adjusted journal entries with the rest of the period's financial information and store them in a safe place for easy access.
